FOREWORD

The presentation of budget 2003 followed high expectations, speculations and hype. The change of guard in midstream following a perceived regressive and unpopular budget by the predecessor Finance Minister coupled with the challenge of containing the fiscal imbalances made the exercise a tight-rope walk for the incumbent Finance Minister. Eyes were fixed on how the Finance Minister will balance the measures for growth with the populist measures for creating a political climate conducive to the Union and State elections which are round the corner. To add to his woes, were the war clouds looming large on the horizon and the subdued outlook of recovery in global economic activities and world trade from which India could not have remained isolated. The growing menace of terrorism and deteriorating relationship with our neighbour, telling monsoon deficiency leading to negative growth in agricultural sector and depressed capital market added to the challenge before the Finance Minister.

All was not, however, dismal on the economic front. There were pockets of sunshine amidst the darkness of adversities in certain areas. Inspite of slowdown in economic activities worldwide, we were able to project a growth of 6% in the industrial sector and 5.8% in the service sector. With negative growth of 3.1% in agricultural sector due to failing monsoons, India was able to achieve an overall growth in G.D.P. of 4.4% which, even though decelerated in relation to average annual growth of 5.5% in the past 5 years and the projected growth for 2002-03, was somewhat encouraging in the context of the global scenario. Inflation dropped to the lowest figure of 2.6% in mid-January based on WPI. After consistent fall in value, rupee appreciated in dollar value by 2.1% in December 2002 over its value in March 2002 although it fell in relation to sterling, euro and yen. Foreign exchange reserves have swelled to more than $ 75 billions by now -- a massive recovery from early 1990s when the country was on the brink of default. The most encouraging aspect of it was that a sizeable part of accretion in reserves came from current account surplus and non-debt creating capital inflows which accounted for almost two-third of total accretion. After more than two decades we had a current account surplus in 2001-02 equivalent to 0.3% of G.D.P. mainly because of buoyant net invisible inflows. Continued heavy inflow of remittances from invisibles and a sharp rise in export makes it possible for the surplus to continue in the current fiscal year. Exports in dollar terms are growing at 20.4% and the pace is likely to be maintained subject to the contingency of war.

The Tarapore Committee which prepared a road map for convertibility laid down preconditions for full capital account convertibility which included low inflation rate, low fiscal deficit, sizeable foreign exchange reserves and a strong banking system. India has already achieved two of these criteria viz. low rate of inflation and sizeable foreign exchange reserves. It has taken positive steps to reduce NPAs of banks by the enabling legislation like Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest Act. But for containment of fiscal deficit the stage is set for capital account convertibility. The Government has been steadily moving towards that goal. Radical relaxations for outbound investment in the shape of liberal permission for acquisition of foreign securities and purchase of immovable properties abroad were announced in January 2003. Further relaxations have been, as expected, announced in the budget to permit investment in different core activities, raising FDI limit in the banking sector and liberalizing prepayment of ECB. If macroeconomic indicators are favourable, we may be quite close to full capital account convertibility in the near future.

Large reserves of foreign exchange may be instrumental to some extent in isolating the economy from the economic devastations of the Iraq war and will provide a cushion in the event of war taking place.

While there are some encouraging indicators of economic health, one cannot lose sight of the serious problem of mounting fiscal deficit. Fiscal deficit of the Central Government, as a proportion of GDP, which had increased from 4.1% in 1996-97 to 5.6% in 2000-01 rose further to an estimated 5.9% in 2001-02. In absolute terms, fiscal deficit in nine months of current year reached to Rs.86,269/- crores which is almost equal to last year in the corresponding period. The last three months are crucial, as they are fraught with serious uncertainties affecting both revenue collection and expenditure management. Enhanced food subsidies, fertilizer subsidies, and subsidies on LPG, Kerosene, oil etc., expenditure on drought relief and other welfare measures actuated by impending elections might put pressure on fiscal administration. With disinvestment not running as programmed and States continuing with overspending, fiscal deficit may be difficult to be contained within the budgeted figure. The Finance Minister had a difficult task to perform. With the concessions proposed in direct and indirect taxes and welfare measures announced, even the projected deficit is 5.6% this year and, if past experience is any guide, it will need great financial discipline to stick to it, particularly in view of uncertainties of the time ahead.

The budget making this year had a unique feature. It was for the first time that the budget making process was sought to be made participative and consultative with an amount of seriousness to demystify the budget. The mid year review was made for the first time for enabling a better understanding of the direction which the economy should take and the compulsions before the policy makers. Appointment of the Task Force headed by Shri Kelkar – the issue of discussion paper based on its interim recommendations, the debate it generated and publication of final recommendations were steps towards a transparent budget. The Task Force recommended procedural and structural reforms towards rationalizing the tax system both in the area of direct and indirect taxes. It sought to give a new direction to the system to make it simple, distortion-free and rational, ensuring revenue neutrality by adjusting rate structure to compensate for scrapping of exemptions, rebate and deductions. The politicians' response to the recommendations was obviously not favourable and the Finance Minister's compulsion to appease coalition partners and special interest groups eventually resulted in political expediency having an upper hand which underlined the political economy of tax reforms in the country. Contrary to removal of tax sops, additional sops have been proposed by way of increased limit for senior citizens deduction for education expenses, raising of standard deduction, removal of surcharge, exemption in respect of royalty from patents, relief to private hospitals and to institutions providing long term finances to them, higher deduction u/s. 80L and host of other relief measures.

Among measures to compensate for relief is the dividend distribution tax of 12.5%, reduction in interest rate on small saving schemes and instruments, increase in service tax and bringing more services in tax net, surcharge on diesel and additional excise duty on certain items.

The budget has given due stress to poverty alleviation, health employment and other welfare aspects to improve the lot of people. It has taken into consideration, the needs of agricultural, industrial, information, housing, plantation and bio-technology sectors and introduced measures to improve performance therein. Schemes like Health Insurance Scheme, Insurance and Pension Scheme are fulfillment of long felt needs and will, in some measure, provide relief to pensioners and less advantaged citizens who are hit hard by significant reduction in interest rates.

In the area of indirect taxes proposals have been made to rationalize the excise duty structure and to maintain the trend of reduction in custom duties.

One aspect of fiscal consolidation involving tax reform which need special mention is steps announced to introduce information technology in tax administration and to simplify procedures to make the administrative tax-payer friendly. The Task Force deserves commendation for its recommendations in this regard and the Finance Minister for accepting them. If only the same are implemented expeditiously and sincerely, it will go a long way in substantially improving tax compliance.

Among the amendments proposed in the procedural aspects of the Income-Tax Act, a special mention needs to be made of a proposal to scrap Chapter XIV B dealing with Block assessments of search cases. The chapter was designed to avoid delay in completion of assessments and avoid hassles to the tax-payers by avoiding the need of reopening completed assessments of earlier years, if the seized material indicated that the escaped income related to earlier years. Subsequent orders as a result of appeals etc. involved further action by the Assessing Officer. The law, over the years, had settled and the provision was working satisfactorily except for a few cases of mishandling by the authorities. In case the provisions of two assessments were creating problems, a solution could have been found within the concept of block assessment.

A very important proposal in the Budget has been the abolishing of long term capital gains tax on sale of listed shares acquired after 1 March 2003. Coupled with the exemption of dividend from income tax in the hands of the receiver, this may be just the boost needed for a revival in the capital markets.

Overall the budget is designed more as a welfare budget rather than one aimed at taking the economy out of its present slowed down stage. It would appear that the Finance Minister has tried to live up to his promise of "Garib ke pet me dana, grihini ki tukia mein anna."

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